Paul Crichton
The government has released draft legislation proposing to end the special tax treatment for furnished holiday lettings (FHL), effective from 6 April 2025 for individuals and 1 April 2025 for corporation tax. This change will eliminate the current tax benefits that FHL landlords have received in four key areas, bringing their tax treatment in line with other property businesses:
- Finance Cost Restrictions: Loan interest on FHLs will be subject to the basic rate of Income Tax, like other property types.
- Capital Allowances Removed: The ability to claim capital allowances for new expenditures and relief for replacing domestic items will be removed.
- Reliefs from Chargeable Gains Tax Removed: Access to reliefs for trading business assets will also be removed.
- Pension Relief Calculations: FHL income will no longer be included in relevant UK earnings for calculating maximum pension relief.
Following this repeal, former furnished holiday let properties will be integrated into the individual’s UK or overseas property business and will be subject to the same regulations as residential property businesses.
Transitional Rules
Existing FHL businesses with an ongoing capital allowances pool can continue to claim writing-down allowances on that pool. However, any new expenditure incurred on or after the effective date must be evaluated according to the property business rules.
After the changes, former FHL properties will be integrated into the individual’s UK or overseas property business, as applicable. That property business will then include the amalgamated profits and losses of all the properties in that business.
Losses incurred from an individual’s FHL business can be carried forward and offset against future profits of either their UK or overseas property business, as appropriate.
Eligibility for Capital Gains Tax (CGT) roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings will end on 6 April 2025.
In relation to CGT business asset disposal relief, where the FHL conditions are met for a business that ceased before 6 April 2025, the relief may still apply to disposals made within the standard 3-year period following the cessation of the business.
There is also an anti-forestalling rule that will take effect from 6 March 2024 to prevent taxpayers from securing a tax advantage by using unconditional contracts to claim capital gains relief under the current FHL rules.